Newsletter May 11, 2002 Newsletter May 11, 2002


Stantec and Mapleleaf are updated.

New Research Available

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Stantec’s Smart Growth Strategy

Stantec has recently grown partly through a large number of acquisitions of smaller Engineering Consulting Firms including six acquisitions in 2001.

It’s important to note that these were all non-publicly traded companies.

Privately held companies tend on average to be available cheaper than publicly traded companies. Private companies can typically be purchased for a lower multiple of earnings compare to publicly traded companies. The owners of private firms cannot easily dispose of their shares. Investors will typically pay more for a publicly traded company than a similar private company because the investor can easily sell the public shares if he or she needs the money or otherwise wants out of the investment.

Since Stantec is a publicly traded company, Stantec adds immediate value to the privately held firms acquired. For example Stantec may be able to buy a firm for say 8 times earnings, but because the investment then becomes public, Stantec’s value may rise say 16 times the amount of earnings purchased. In this ideal scenario Stantec would be creating $2.00 in value for each $1.00 it spends on acquisitions. I can’t prove that this is happening at Stantec, because I don’t have all the data, but I strongly suspect something along these lines is occurring.

Contrast this with companies that go around buying publicly traded companies. In that case the acquiring company usually has to pay a premium, which is often over 50% of the value of the acquired company. Often there are few synergies and so these companies end up creating perhaps 66 cents of value for each dollar spent on acquisitions. So in that unhappy case the company destroys 34 cents every time it spends a dollar on an acquisition. I suspect Nortel was a champion at that game, my sense is that with every dollar they spent on obscenely over-priced acquisitions since about 1999, they probably destroyed something over 90 cents in value.

In some cases, buying publicly traded companies is okay but overall it is pretty clear that a strategy of buying private companies at a discount to what they would trade at on the stock market, is far superior to a strategy of buying, at a premium, companies that are already trading publicly.

There are a number of other companies that generally buy private rather than public firms. One of the most prominent and most successful is Warren Buffett’s Berkshire Hathaway.

For more information on Smart Growth Strategies versus Dumb Growth Strategies see my article on growth strategies.


I suspect that most investors don’t really understand Income Trusts very well. I made several visits to Chapters and found almost nothing on the subject. Investment books and income tax guides that I browsed had little information on Income Trusts. An internet search also turned up little.

But Income Trusts have performed extremely well in the markets and are an important asset class. I was able to compile some useful information, see my article on Understanding Income Trusts


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